SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 26, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11257
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Checkpoint Systems, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 22-1895850
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
550 Grove Road PO Box 188 Thorofare, New Jersey 08086
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(Address of principal executive offices) (Zip Code)
(609) 848-1800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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As of August 5, 1994, there were 10,328,198 shares of the Common Stock
outstanding.
CHECKPOINT SYSTEMS, INC.
FORM 10-Q
INDEX
Page No.
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Part I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
Part II. OTHER INFORMATION
Item 1 Legal Proceedings 12
Item 6 Exhibits and Reports on Form 8-K 12
SIGNATURES 13
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
June 26, December 26,
1994 1993
------------ ------------
(Unaudited)
ASSETS (Thousands)
------
CURRENT ASSETS
Cash and cash equivalents $ 1,272 $ -
Accounts receivable, net of allowances
of $1,410,000 and $2,237,000 28,119 24,239
Inventories 28,858 25,450
Other current assets 4,483 5,213
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Total current assets 62,732 54,902
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 32,189 30,862
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED 8,922 8,919
INTANGIBLES 5,921 5,098
DEFERRED TAXES, net of valuation allowance 479 479
OTHER ASSETS 5,760 4,739
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TOTAL ASSETS $116,003 $104,999
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 5,159 $ 9,716
Accrued compensation and related taxes 3,032 1,907
Income taxes 1,135 792
Unearned revenues 2,933 2,645
Other current liabilities 6,594 7,761
Short-term borrowings and current portion
of long-term debt 5,828 4,097
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Total current liabilities 24,681 26,918
LONG-TERM DEBT, LESS CURRENT MATURITIES 34,526 24,302
SHAREHOLDERS' EQUITY
Preferred Stock, no par value, authorized
500,000 shares, none issued
Common Stock, par value $.10 per share,
authorized 100,000,000 shares, issued
11,108,000 and 10,979,198 1,111 1,097
Additional capital 19,786 18,346
Retained earnings 42,100 40,506
Common stock in treasury, at cost,
799,000 shares (5,664) (5,664)
Foreign currency adjustments (537) (506)
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TOTAL SHAREHOLDERS' EQUITY 56,796 53,779
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $116,003 $104,999
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See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter (13 Weeks) Ended Six Months (26 Weeks) Ended
------------------------ ---------------------------
June 26, June 27, June 26, June 27,
1994 1993 1994 1993
-------- -------- -------- --------
(Thousands, except per share data)
Net Revenues $28,656 $18,026 $54,879 $38,042
Cost of Revenues 15,104 11,146 29,064 22,462
------ ------ ------ ------
Gross Profit 13,552 6,880 25,815 15,580
Selling, General
and Administrative
Expenses 11,934 9,069 22,945 17,071
------ ------ ------ ------
Operating
Income 1,618 (2,189) 2,870 (1,491)
Contract Settlement
Income - 3,500 - 3,500
Interest Income 173 34 284 63
Interest Expense 611 211 1,023 290
Other Income (Expense) 241 - (7) -
------ ------ ------ ------
Earnings Before
Income Taxes 1,421 1,134 2,124 1,782
Income Taxes 354 250 530 391
------ ------ ------ ------
Net Earnings $ 1,067 $ 884 $ 1,594 $ 1,391
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Net Earnings Per
Share $ .10 $ .09 $ .15 $ .13
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Six Months (26 Weeks) Ended June 26, 1994
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Common Additional Retained Treasury Currency
Stock Capital Earnings Stock Adjust. Total
------- ------- ------- ------- ------- ------
(Thousands)
Balance,
December 26, 1993 $ 1,097 $18,346 $40,506 $(5,664) $ (506) $53,779
Net Earnings 1,594 1,594
Exercise of Stock
Options 14 1,440 1,454
Foreign Currency
Adjustments (31) (31)
------- ------- ------- ------- ------- -------
Balance at
June 26, 1994 $ 1,111 $19,786 $42,100 $(5,664) $ (537) $56,796
======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months (26 Weeks) Ended
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June 26, June 27,
1994 1993
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(Thousands)
Cash inflow (outflow) from operating activities:
Net earnings $ 1,594 $ 1,391
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net book value of equipment rented in
excess of equipment sold (1,928) (773)
Long-term customer contracts (890) (128)
Depreciation and amortization 3,980 2,496
Provision for losses on accounts receivable (827) 100
(Increase) decrease in current assets:
Accounts receivable (3,067) (620)
Inventories (3,409) (860)
Other current assets 730 (1,079)
Increase (decrease) in current liabilities:
Accounts payable (4,571) (821)
Accrued compensation and related taxes 1,125 (498)
Income taxes 343 283
Unearned revenues 288 (181)
Other current liabilities (1,466) (9)
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Net cash used by operating activities (8,098) (699)
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Cash outflow from investing activities:
Acquisition of property, plant and equipment (2,389) (2,551)
Acquisition, net of cash acquired - (1,875)
Purchase of customer list - (560)
Other investing activities (1,649) (3,366)
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Net cash used by investing activities (4,038) (8,352)
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Cash inflow (outflow) from financing activities:
Proceeds from stock options 1,454 1,559
Proceeds of debt 15,307 5,522
Payment of debt (3,353) (350)
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Net cash provided by financing
activities 13,408 6,731
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Net increase (decrease) in cash and cash
equivalents 1,272 (2,320)
Cash and cash equivalents:
Beginning of period - 2,320
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End of period $ 1,272 $ -
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See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its wholly-owned subsidiaries (the "Company"). All
material intercompany transactions are eliminated in consolidation. The
consolidated financial statements and related notes are unaudited and do
not contain all disclosures required by generally accepted accounting
principles. Refer to the Company's Annual Report on Form 10-K for the
fiscal year ended December 26, 1993 for the most recent disclosure of the
Company's accounting policies.
The consolidated financial statements include all adjustments necessary to
present fairly the Company's financial position at June 26, 1994 and
December 26, 1993 and its results of operations and changes in cash flows
for the thirteen and twenty-six week periods ended June 26, 1994 and
June 27, 1993.
2. INVENTORIES
June 26, December 26,
1994 1993
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(Thousands)
Raw materials $ 6,098 $ 8,256
Work in process 1,712 705
Finished goods 21,048 16,489
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$28,858 $25,450
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Inventories are stated at the lower of cost (first-in, first-out method)
or market. Cost includes material, labor and applicable overhead.
3. INCOME TAXES
Income taxes are provided for on an interim basis at an estimated
effective annual tax rate principally on earnings from the Company's U.S.
operations. Earnings generated by the operations of the Company's Puerto
Rico subsidiary are substantially exempt from U.S. Federal income taxes
under Section 936 of the Internal Revenue Code and substantially exempt
from Puerto Rico income taxes.
In 1993, Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" was adopted. Under this method, deferred
tax liabilities and assets are determined based on the difference between
financial statement and tax basis of assets and liabilities using enacted
statutory tax rates in effect at the balance sheet date. The adoption of
this new standard did not have a material effect on the Company's
financial statements.
4. PER SHARE DATA
Per share data is based on the weighted average number of common and
common equivalent shares (stock options) outstanding during the periods.
The number of shares used in the per share computations for the thirteen
and twenty-six week periods ended June 26, 1994 and June 27, 1993 were
10,722,000 and 10,613,000 (1994) and 10,343,000 and 10,436,000 (1993),
respectively.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (continued)
5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for the thirteen and twenty-six week periods ended June 26,
1994 and June 27, 1993, respectively, included interest payments of
$494,000 and $896,000 (1994), and $212,000 and $276,000 (1993), and income
taxes paid of $17,000 and $124,000 (1994), and $97,000 and $140,000
(1993).
Excluded from the 1994 Consolidated Statements of Cash Flows is a non-cash
activity relating to the acquisition of a licensing agreement in which the
Company recorded the full cost of the agreement and the associated
liability.
6. INTANGIBLES
Intangibles consist of patents, licenses, customer lists, and software
development costs. The costs relating to the acquisition of patents and
licenses are amortized on a straight-line basis over their economic useful
lives, which is considered to be ten years. Accumulated amortization
approximated $1,179,000 and $473,000 at June 26, 1994 and December 26,
1993, respectively.
The costs of internally developed software is expensed until the
technological feasibility of the software has been established.
Thereafter, all additional software development costs are capitalized and
subsequently reported at the lower of unamortized cost or net realizable
value. The cost of capitalized software is amortized over the products'
estimated useful lives or five years, whichever is shorter. During the
first half of 1994, $391,000 of software development costs were
capitalized. Accumulated amortization of these costs approximated
$727,000 and $444,000 at June 26, 1994 and December 26, 1993,
respectively.
7. ACQUISITIONS
On July 8, 1993, the Company purchased all the outstanding capital stock
of ID Systems International B.V. and ID Systems Europe B.V., related Dutch
companies engaged in the manufacture, distribution and sale of security
products and services ("ID Systems Group"). In connection with this
acquisition, the Company filed a Form 8-K with the Securities and Exchange
Commission on July 22, 1993.
The following table represents unaudited pro forma combined results of
operations for the first half of 1994 and 1993, as if the acquisition of
the ID Systems Group had occurred at the beginning of 1993. Other
acquisitions made during 1993 were not material to the results of
operations and thus are not presented. The following results are not
necessarily indicative of what would have occurred had the acquisition
been consummated as of that date or of future results:
Six Months (26 weeks) Ended
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June 26, June 27,
1994 1993
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(Thousands, except per share data)
Net revenues.................................$54,879 $44,434
Net earnings (loss)..........................$ 1,594 $(4,245)
Earnings (loss) per common share.............$ .15 $ (.44)
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. ACCOUNTING FOR FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company's balance sheet accounts of foreign subsidiaries are
translated into U.S. dollars at the rate of exchange in effect at the
balance sheet dates. Revenues, costs and expenses of the Company's
foreign subsidiaries are translated into U.S. dollars at the average rate
of exchange in effect during each reporting period. The resulting
translation adjustment is recorded as a separate component of
stockholders' equity. In addition, gains or losses on long-term
intercompany transactions are excluded from the results of operations and
accumulated in the aforementioned separate component of consolidated
stockholders' equity. All other foreign transaction gains and losses are
included in the results of operations.
The Company has purchased certain foreign currency forward contracts in
order to hedge anticipated rate fluctuations in Europe. Transaction gains
or losses resulting from these contracts are recognized over the contract
period.
Aggregate foreign currency transaction losses are included in "Other
Income (Expense)" in the Consolidated Earnings Statement.
9. LONG-TERM DEBT
On March 23, 1994, the Company issued notes in the aggregate principal
amount of $12,000,000 to two insurance companies pursuant to a Note
Agreement dated as of March 1, 1994. The notes bear interest at 8.27%
with interest payable semi-annually on April 1, and October 1 of each year
with the first interest payment due October 1, 1994. Three principle
amounts of $4,000,000 each are due April 1, 2000, and April 1, 2001, with
the final payment due April 1, 2002. The notes are uncollateralized and
rank equally with the Company's other funded debt.
10. CONTINGENCIES
On March 10, 1993, the United States International Trade Commission
instituted an investigation of a complaint filed by the Company under
Section 337 of the Tariff Act of 1930. On March 10, 1994, the United
States International Trade Commission issued a Notice of Commission
Determination Not to Review An Initial Determination Finding No Violation
of Section 337 of the Tariff Act of 1930. The Company has capitalized
approximately $2,000,000 in patent defense costs, which is included in
"Intangibles". The Company filed a Notice of Appeal with the United
States Court of Appeals for the Federal Circuit on May 6, 1994. Although
the Company's management ultimately expects a favorable outcome, should
resolution of this matter result in less than a successful defense of the
patents in question the deferred patent costs noted above will be written
off as a charge to earnings at the time of such resolution. Such an event
could impact the Company's ability to meet its financial covenant relating
to net earnings under several loan agreements.
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash and cash equivalents increased during the first half of 1994 from
zero to a balance of $1,272,000. For a detailed analysis of the Company's
sources and uses of cash from operating, investing, and financing
activities refer to the Consolidated Statements of Cash Flows in this
report. Below is a discussion that further enhances the Statements of
Cash Flows.
Long term customer contracts increased $762,000 during the first half of
1994 compared to the same period last year ($890,000 versus $128,000).
Depreciation and amortization increased $1,484,000 during the first half
of 1994 compared to the same period last year ($3,980,000 versus
$2,496,000). Depreciation increased principally as a result of
investments in manufacturing equipment and management information systems.
Increases in amortization resulted from various purchased intangibles,
including software development cost and the cost of patents, licenses, and
trademarks, and the purchase of a customer list. In addition, goodwill
generated from acquisitions made throughout 1993 have increased
amortization expense.
Accounts receivable increased $3,067,000 resulting from significantly
increased revenues posted in the first half, representing a 44% increase
in revenues compared to the first half of 1993.
Property, plant and equipment expenditures decreased $162,000 during the
first half of 1994 compared to the same period last year ($2,389,000
versus $2,551,000). Planned additional capital investments for the
remainder of the year are estimated at $1.1 million. The expenditures for
1994 include the purchase of equipment for the Company's research and
development activities, information systems to support international
growth, and expansion of manufacturing equipment for the Electronic
SignaturesR facilities in Puerto Rico and the Caribbean.
Inventories increased $3,409,000 as a result of anticipated sales for the
remainder of the year in addition to a significant expansion of the
Company's product offerings.
Other investing activities increased $1,649,000 as a result of a licensing
agreement relating to fluid tags, further capitalization of software
development costs net of amortization incurred, purchases of product
licenses, and increased lease receivables.
As of June 26, 1994, the current ratio was 2.5 to 1. The quick ratio was
1.2 to 1. The debt-to-equity ratio was 1.0 to 1. During the first
quarter of 1994, the Company completed a private placement debt funding of
$12,000,000. A significant portion of the proceeds were used to pay down
existing debt under the Company's long-term revolving credit facility. The
remaining proceeds were used for general corporate purposes. Management
continues to evaluate additional funding options in order to support
continuing worldwide growth. As of June 26, 1994, the Company had
$3,200,000 available under a revolving credit facility. The Company has
never paid a cash dividend and has no plans to do so in the foreseeable
future.
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Results of Operations
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Second Quarter 1994 Compared to Second Quarter 1993
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Net revenues for the current quarter increased 59% to $28,656,000 compared
to $18,026,000 for the second quarter of 1993. As a percent of net
revenues, domestic and foreign net revenues were 58% and 42%,
respectively, compared to 72% and 28% for the second quarter of 1993.
Domestic Electronic Article MerchandisingR (EAM)R net revenues increased
$3,319,000 or 28% with foreign EAM net revenues increasing $6,909,000 or
137% when compared to the second quarter of 1993. The increase in
domestic net revenues was due to several significant sales to current and
new retailers in addition to higher selling prices. The increase in
foreign net revenues resulted primarily from the Company's direct presence
in Western Europe, increased sales from the Company's foreign subsidiaries
in Canada, Mexico, and Argentina, and increased sales to the Company's
foreign distributors located throughout the world.
In July 1993, the Company purchased the entire share capital of ID Systems
International B.V. and ID Systems Europe B.V., (the "ID Systems Group")
related Dutch companies engaged in the manufacture, distribution and sale
of security products and services (refer to Note 7 of Notes to
Consolidated Financial Statements). Prior to the acquisition of the ID
Systems Group, sales in Western Europe were made through an independent
distributor. As a result of this acquisition, sales to Western Europe for
the second quarter of 1994 totalled $6,100,000 as compared to $201,000 for
the second quarter of 1993 by one former distributor.
Net earnings were $1,067,000 or $.10 per share versus net earnings of
$884,000 or $.09 per share for the similar quarter last year. The primary
factors contributing to the increase were the 59% increase in revenues and
the 9.1% increase in the gross profit margin. During the second quarter
of 1993, and as a result of the Company terminating an exclusive
distribution agreement with their distributor in Western Europe, the
Company recorded $3,500,000 in contract settlement income.
The 9.1% increase in the gross profit margin (47.3% versus 38.2%) was due
to: overall higher selling prices achieved primarily as a result of
selling direct into the international markets in which former distributors
enjoyed wholesale pricing; decreased product cost as a result of
manufacturing efficiencies; and, decreased technology expenses slightly
offset by an increase in field service expenses.
Selling, general and administrative expenses increased $2,865,000 an
increase of 8.6% as a percent of sales (41.7% versus 50.3%) compared to
the second quarter of 1993. The increase of $2,865,000 over the prior
year's quarter is primarily attributable to directly selling in foreign
markets previously served by distributors.
The income tax rate is based on an estimated annual tax rate of 25%. The
current quarter's rate is higher than the 22% rate used in the prior
year's second quarter as a result of the projected impact of foreign
taxable earnings which are currently taxed at a higher rate than domestic
earnings.
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Results of Operations
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First Half 1994 Compared to First Half 1993
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Net revenues increased 44% to $54,879,000 compared to $38,042,000 recorded
in the first half of 1993. As a percent of net revenues, domestic and
export net revenues were 60% and 40% compared to 67% and 33% for the
similar period last year.
Domestic Electronic Article MerchandisingR (EAM)R net revenues increased
$6,838,000 or 29% and export EAM net revenues increased $9,393,000 or 74%
when compared to the first half of 1993. The domestic revenue growth
resulted from significant sales of sensors and deactivation equipment to
new customers as well as a increased sales of disposable targets to new
and existing customers. The Company's direct presence in Western Europe
contributed $6,778,000 of the $9,393,000 increase in foreign revenues with
the remainder attributed to the Company's subsidiaries in Argentina,
Australia, Canada, and Mexico combined with other distributors located
worldwide.
Net earnings were $1,594,000 or $.15 per share versus net earnings of
$1,391,000 or $.13 per share for the similar period last year. The
primary factors contributing to the increase were the 44% increase in
revenues and the 6.0% increase in the gross profit margin. In addition,
during the first half of 1993, the Company recorded $3,500,000 in contract
settlement income.
The 6.0% increase in the gross profit margin (47.0% versus 41.0%) over the
first half of 1993 was primarily due to: overall higher selling prices
achieved primarily as a result of selling direct into the international
markets in which former distributors enjoyed wholesale pricing, and
decreased product cost as a result of manufacturing efficiencies.
Selling, general and administrative expenses increased $5,874,000 but
decreased 3.1% as a percent of sales (41.8% versus 44.9%) compared to the
first half of 1993. The increase in expenditures over the prior year's
comparable period is primarily attributable to directly selling in foreign
markets previously served by distributors.
The income tax rate is based on an estimated annual tax rate of 25%. This
rate is higher than the 22% rate used during the first half of 1993 as a
result of the projected impact of foreign taxable earnings which are
currently taxed at a higher rate than domestic earnings.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On March 10, 1993, the United States International Trade Commission
("Commission") instituted an investigation of a complaint filed by the
Company under Section 337 of the Tariff Act of 1930. The complaint, as
amended, alleged that six respondents imported, sold for importation, or
sold in the United States after importation certain anti-theft
deactivatable resonant tags and components thereof that infringed certain
U.S. Letters Patents of which the Company is exclusive licensee. The
Commission's notice of investigation named six respondents, each of whom
was alleged to have committed one or more unfair acts in the importation
or sale of components or finished tags that infringe the asserted patent
claims. Those respondents are: Actron AG; Tokai Denshi Co. Ltd.; ADT,
Limited; All Tag Security AG; Toyo Aluminum Ltd.; and Custom Security
Industries, Inc.
On March 10, 1994 the United States International Trade Commission issued
a Notice of Commission Determination Not to Review An Initial
Determination Finding No Violation of Section 337 of the Tariff Act of
1930. The Company filed a Notice of Appeal with the United States Court
of Appeals for the Federal Circuit on May 6, 1994. Although the Company
ultimately expects a favorable outcome, should resolution of this matter
result in less than a successful defense of the patents in question the
deferred patent costs of approximately $2,000,000 will be written off as a
charge to earnings at the time of such resolution. Such an event could
impact the Company's ability to meet its financial covenant relating to
net earnings under several loan agreements.
Item 6. Exhibits and Reports on Form 8-K
(b) No reports on Form 8-K have been filed during the second quarter of
1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 11, 1994
CHECKPOINT SYSTEMS, INC.
Steven G. Selfridge
Senior Vice President - Operations
Chief Financial Officer
and Treasurer
August 11, 1994
Mitchell T. Codkind
Corporate Controller and
Chief Accounting Officer